A Weaker Euro for a Stronger Europe

There are few if any panaceas in economics. But a sharp decline in the euro’s exchange rate – say, by 15% – would remedy many of the eurozone’s current economic problems, including slow growth, high unemployment, and a growing risk of deflation.

CAMBRIDGE – Despite the recent upturn in some of its member countries, the eurozone’s economy remains in the doldrums, with the overall rate of annual GDP growth this year likely to be only slightly higher than 1%. Even Germany’s growth rate is below 2%, while GDP is still declining in France, Italy, and Spain. And this slow rate of growth has kept the eurozone’s total unemployment rate at a painfully high 12%.

Slow growth and high unemployment are not the eurozone’s only problems. The annual inflation rate, at just 0.5%, is now so close to zero that even a minor shock could push it into negative territory and trigger a downward price spiral. Deflation would weaken aggregate demand by raising the real (inflation-adjusted) value of household and corporate debt, and by increasing real interest rates. Lower demand could, in turn, cause the fall in prices to accelerate, sending prices into a dangerous tailspin.

There are few if any panaceas in economics. But a sharp decline in the euro’s exchange rate – say, by 15% – would remedy many of the eurozone’s current economic problems. A weaker euro would raise the cost of imports and the potential prices of exports, thus pushing up the eurozone’s overall inflation rate. Devaluation would also boost average eurozone GDP growth by stimulating exports and encouraging Europeans to substitute domestically produced goods and services for imported items. Although competitiveness within the eurozone would be unaffected, a weaker euro would significantly improve the external balance with the rest of the world, which accounts for about half of eurozone trade.

Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.

Faced with bleak economic data, European Central Bank President Mario Draghi appears ready to discard the orthodox policymaking rule book, much like Shinzo Abe in Japan. But can Draghi's recent call for a combination of structural reform, fiscal and monetary stimulus, and the removal of supply-side bottlenecks gain the necessary political support, and would his prescription work?

There are many countries with huge Euro reserves. If the Euro expose to devaluation, those countries would face with serious lost. Can the economists offer ECB to create solid expectations toward sharply decreasing of Euro's value? Maybe, this is the easiest way of devalue euro...

Martin Feldstein says that a weak Euro will make Europe more competitive in exports. But he has previously said that a weak dollar will make the U.S. more competitive in exports. What Feldstein doesn't get is that you cannot have a world with ALL WEAK CURRENCIES - they are measured against each other. What I will say is that a world with gold significantly higher in price will cure a lot of ailments, because it will reflect currency devaluation around the world. We will get out of our problems when gold is $6,000-$8,000.

Feldstein admits that a weaker Euro does not address the internal Eurozone competitiveness imbalances, though it would boost the current accounts of the peripheral countries and raise overall inflation. Thus the missing link is relatively higher wages and prices in Germany.
I went through all of these arguments three years ago:
https://sites.google.com/site/savingtheeuro/
http://silverberg-on-meltdown-economics.blogspot.co.at/2011/12/standing-on-toes-of-giants.html

Currency devaluation has long been the method of choice in parts of Europe to remedy poor productivity growth and general reluctance to implement structural reforms. The short-term effect of devaluation is like a shot of drugs in the arm of an adict. The long-term consequences are dismal and typically outweight the short-term gain. Prescribing this to the Eurozone as a whole is a very dangerous path. Apart from this policies to weaken the EUR would put immense pressure on countries like Switzerland, which are trying to maintain a minimum exchange rate with the EUR. If the ECB started to sell EUR for "a basket of currencies" including CHF, the SNB would have to join in, selling CHF and buying EUR to maintain the minimum exchange rate.

Lie that Pisa Tower, the House of Eurozone is tilting towards collapse because it was built on very flawed, uneven fundamentals: low productivity in the South and high productivity in the North. Long ago I proposed cutting the Eurozone into Seuro and Nero Zones, to remedy this basic flaw.

Uplifting the entire Eurozone structure (Pisa Tower) on added liquidity brought about some euro devaluation-caused fragmentary and temporary successes in exports will only serve to destabilize the whole structure even further.

There is no economical or financial problem in Europe.
Economics, Financial systems are simply the external representations of the interconnections in between people.
There is a "connection problem" in Europe and all over the world.
Despite evolving into a globally inter-dependent, integral system we still want to remain separated and compete with each other, we still want to succeed at the expense of others.
Inter-dependence and ruthless competition is contradictory and self-destructive.
And since globalization, inter-dependence is not man-made but evolutionary, we cannot change it.
We can only change how we relate to each other, how we connect.
The only solution for Europe's and the global human society's problems is full scale integration.
A globally mutual, complementing cooperation would almost immediately solve all our present problems, tranquilize the threatening conflicts, potential war scenarios, and would give us the perfect platform for a sustainable and peaceful future.

I wholly agree with Feldstein's analysis as regards Europe, but I imagine the benefits may be rather ephemeral. US growth dropped to 1% in 1QTR 2014, mostly due to a drop in exports. A devaluation of the euro to help European exporters is bound to aggravate the problem of lackluster worldwide demand. It appears that the world is still hoping to exit an historic credit and debt bubble and balance sheet recession with a minimum of pain. That still sounds like a Hail Mary outcome. Will we ever get true price discovery based on the income fundamentals of the world economy?

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PS OnPoint

The Mueller report in America, along with reports of interference in this week’s European Parliament election, has laid bare the lengths to which Russia will go to undermine Western democracies. But whether Westerners have fully awoken to the threat is an open question.

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